A quarter of the incremental earnings generated by the S&P 500 in 2011 will be sourced from just four companies, all of which are financials, says Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management (LMCM).
The four stocks are all banks, namely Bank of America, Citigroup, JP Morgan and Wells Fargo.
Miller adds that American financial stocks are also predicted to have the fastest earnings and dividends growth in 2011, explaining why he is heavily overweight in the sector in the LMCM Value Trust and the Opportunity Trust.
He says: “Many fund managers are underweight in financials because of uncertainty and risk, yet financials have never been as cheap as they are now on a price-to-book basis. All the uncertainty is reflected in their price.”
Miller is also overweight in the technology and healthcare, as he says alongside financials, they are the three cheapest sectors in the market based on valuations. (article continues below)
“These three sectors have only been this inexpensive for 10% of all time,” he adds.
Areas in which Miller is underweight in his Value and Opportunity funds are materials, industrials, energy and consumer staples.
“All these sectors are attractive on an absolute basis, it is just they are not as attractive as some of the other sectors.”
Meanwhile Miller says the noise being created by a second round of quantitative easing in America is “far greater than it warrants”.
He says: “QE has many different consequences, many of which are behavioural and psychological, but none are economic. The Fed has made it clear that QE2 is a data driven experiment and it is being performed on a tightly coupled, highly interdependent, complex adaptive system, a delicate machine the working of which we do not understand.
“If we did understand it, we would not be in the present predicament. So, as with most things involving markets, a good deal of humility is called for, but not much is in evidence.”